Bid/offer spread

From Freepedia

The bid/offer spread is the difference between the buying (bid) and selling (offer) price of the same stock or currency transaction. Much of a broker's profit comes from the difference between the bid and offer prices.

For instance, the exchange rate between the South African rand and the United States dollar might be 6.50 rand to the dollar. A person looking to convert rand into dollars might have to pay 6.55 rand for each dollar, while a person selling dollars and seeking rand might only receive 6.45 rand for each dollar he converts. It is usually written as 6.45/6.55 on paper.

Similarly, a person might place an order for 100 shares of Amalgamated Widgets. The broker might attempt to buy 100 shares at $12.50 each, and he would be more than happy to sell those shares at $12.60 apiece, bearing in mind that if he sets his sale price higher, the customer might find another broker with a lower price. As a result, spreads are often only what the market will bear.

On United States stock exchanges, the minimum spread for many shares was 12.5 cents (one-eighth of a dollar) until 2001, when the exchanges converted from fractional to decimal pricing, enabling spreads as small as one cent. The change was mandated by the U.S. Securities and Exchange Commission in order to provide a fairer market for the individual investor.